Alternative Ways To Play The Marcellus Shale

As America looks to divest itself of foreign energy, its abundant natural gas reserves are beginning to take center stage. Its clean burning nature, emitting 45% less carbon dioxide than coal and approximately 30% less than oil, makes it an ideal fuel for both electricity generation and transportation fuel. The Department of Energy estimates that gas-fired electricity will climb nearly 31% in 2010, up from five years ago, while coal usage will fall 6.5%. Receiving praise and favorable treatment from both politicians and market pundits alike, natural gas will certainly grow as America's preferred fuel in time.

Fracking the MarcellusAmerica's "Saudi Arabia of gas", the Marcellus shale is helping energize the renewed interest in natural gas. The rock formation, which stretches through West Virginia, Pennsylvania and New York, currently holds an estimated 262 trillion cubic feet (Tcf) of natural gas. New techniques in horizontal drilling and hydraulic fracturing have allowed E&P firms such as Range Resources (NYSE:RRC) to tap into these abundant reserves. Exploration firms are investing nearly $700 million a year to develop the region and land leases have jumped to nearly $2,100 an acre, up from $300 in mid-February.

With traditional natural gas production and imports from Canada declining, the shale formations have the potential to be a real game changer for industry. Analysts estimate that shale formations produced nearly four billion cubic feet of gas a day in 2007, equaling about 7% of national production. Shale gas production is scheduled to increase to nine billion cubic feet a day by 2012, or about 15% of expected national production.

However, there is still much debate over what, if any, environmental damage these new drilling techniques have. Recently, The Delaware River Basin Commission issued a moratorium on new drilling permits in the four-state region while it works on new regulations. Early plans have drillers paying a $5 million assurance bond for each well.

Playing Natural Gases RiseNatural gas and the Marcellus shale have the potential to revitalize our economy and how we fuel our daily lives. However, with potential environmental regulations, investors can't go purchasing every exploration company with acreage in the region. Natural gas will become a bigger source of America's energy pie and some of the more interesting ways to play it are outside First Trust ISE-Revere Natural Gas (NYSE:FCG).

Getting all of this gas to the major consuming regions will take major investment in new pipelines. MarkWest Energy Partners LP (NYSE:MWE) holds significant pipeline operations in Pennsylvania, right in the thick of the Marcellus. The MLP has partnered with some of the biggest players in the region and most recently created a joint venture with NiSource (NYSE:NI) to develop a gathering system in West Virginia's piece of the Marcellus. Growth in the Marcellus will help strengthen MarkWest's 7% dividend yield.

More drilling activity requires one thing: steel. Tenaris SA (NYSE:TS) is one of the top steel producers for the energy industry. The company specializes in a variety of pipes that can be used at high temperatures and pressures and that are optimal for flexible horizontal drilling. In addition, many steel producers are seeing increasing orders from drillers, making the Market Vectors Steel ETF (NYSE:SLX) an ideal play as well.

Disposing of used fracking liquids, and other waste created in the process, will benefit the major environmental services companies. Hazardous waste specialist Clean Harbors (NYSE:CLH) has proven itself in the recent Gulf oil spill and could be the go to company with regards to the Marcellus. The Market Vectors Environmental Services ETF (NYSE:EVX) offers a play on the entire waste industry.

Finally, the heart of the fracking environmental debate is clean water. Following a basket of companies dedicated to generating clean potable water, The PowerShares Water Resources (NYSE:PHO) could see a boost as the long-term implications of hydro fracking on our aquifers become known and need to be treated.

The Bottom LineAs America searches for energy independence, natural gas consumption will only increase and the Marcellus shale will garner more attention. Aside from the obvious plays in the E&P firms drilling in the rock formation, there are many side bets investors can take. The previous stocks and ETFs are just a few examples of the many ways to profit from the expansion of drilling in the region. (To learn more, see our Oil & Gas Industry Primer.)